Financial Setbacks Cause Many to Dip Into Retirement Savings

In a new report, “Financial Shocks Put Retirement Security
at Risk,” The Pew Charitable Trusts examined whether financial setbacks cause
people to tap into their retirement savings. Based on a survey of 5,661
households, Pew found that, in the past year, 13% of people who had experienced
a financial shock drew from their retirement savings.

When all survey respondents were asked how they would handle
an unexpected financial burden, 78% said they would turn to their savings
accounts, 49% said they would use their credit cards, and 25% said they would
draw down money from their retirement account. Over the span of their lifetime,
more than half of households in the nation will experience some type of
financial shock, Pew found.

The organization notes that people who take money out of
their retirement account before age 59 1/2 not only have to pay taxes on the
withdrawals but a 10% early withdrawal penalty. In addition, those who take out
loans are typically banned from contributing to their retirement account over
the life of the loan, and sometimes for an additional six months after it is
paid off.

The median cost of financial shocks was $2,000. In years
when someone in the household was unemployed, got a pay cut or experienced a
marital change such as divorce, separation or a spouse’s death, the household
was more likely to experience someone drawing from his retirement account.

People with a college education or higher were less likely to borrow against
their retirement account than those with only a high school degree.

“This research underscores earlier Pew studies that found many American
families are under financial stress—experiencing medical, employment or other
shocks, and having insufficient liquid resources to deal with them,” says
Alison Shelton, senior officer of The Pew Charitable Trusts’ retirement savings
project. “When families turn to their retirement accounts to deal with
financial shocks, they can permanently lower their retirement savings.”

Pew recommends that policymakers create a way that
employers can automatically deduct small amounts from Americans’ paychecks to
create rainy day funds. This, the organization says, could prevent many people
from raiding their retirement fund.